BEIJING, May 4 (Reuters) - China said on Friday that blind dissident Chen Guangcheng could apply to study abroad, a move praised by U.S. Secretary of State Hillary Clinton and suggesting an end may be near to a diplomatic standoff between Beijing and Washington.

But rights activists sounded a note of caution, saying Beijing could move slowly on granting Chen permisson to leave out of fear that appearing soft might embolden other challengers to Communist Party rule before a power handover late this year.

An announcement by the Chinese Foreign Ministry followed a dramatic and very public appeal by Chen, who spoke by phone to a U.S. congressional hearing on his case and asked to be allowed to spend time in the United States after fleeing 19 months of extra-judicial captivity in his home village.

"If he wants to study abroad, he can apply through normal channels to the relevant departments in accordance with the law, just like any other Chinese citizen," ministry spokesman Liu Weimin said in a brief statement, adding that Chen was still being treated in hospital.

Clinton, in Beijing for strategic and economic talks, said the U.S. ambassador to Beijing, Gary Locke, had spoken to Chen again on Friday when he had confirmed he wanted to go to the United States to study, along with his family.

"Over the course of the day, progress has been made to help him have the future that he wants and we will be staying in touch with him as this process moves forward," she said.

"This is not just about well-known activists; it's about the human rights and aspirations of more than a billion people here in China and billions more around the world and it's about the future of this great nation and all nations," Clinton added.

U.S. officials said they now expect American diplomats and doctors to have regular access to Chen, who campaigned against forced abortions under China's "one-child" policy.

They also said that checks had shown that Chen had three broken bones from his escape, and his foot was put in a cast.

UNIVERSITY FELLOWSHIP

State Department spokeswoman Victoria Nuland said Chen had been offered a fellowship by a U.S. university, where he can be joined by his wife and two children. Ne w York University said it had invited Chen to be a visiting scholar at its law school.

Nuland also said Washington expected Beijing to deal quickly with Chen's application to travel abroad. "The United States government would then give visa requests for him and his immediate family priority attention," she said in a statement.

While some activists said China could drag its feet on Chen, Bob Fu of the Texas-based advocacy group ChinaAid said in a statement on Friday that "Chen is so widely popular now, Beijing probably wants him in New York as soon as possible."

The crisis erupted on April 22, after Chen made a dramatic escape from his rural home, where he was effectively under house arrest, and made his way to Beijing and sought refuge at the U.S. Embassy.

He stayed there for six days until Wednesday when U.S. officials took him to a Beijing hospital after assurances from the Chinese government that he and his family would receive better treatment and could move out of Shandong province, where rights activists said they had suffered surveillance and abuse.

But within hours, Chen, 40, had changed his mind, scuppering what had seemed to be a delicately constructed deal between Chinese and U.S. diplomats to allow him to receive treatment for a broken foot, and be reunited with his wife and children.

Chen, in translated comments, also told the congressional that villagers who had helped him were "receiving retribution" and he was most concerned about the safety of his mother and brothers.

"Chen's frail mother remains detained, his brother Chen Guangfu and nephew Chen Kegui will be sentenced, and the netizens who helped Chen escape, like He "Pearl" Pierong, still face charges," ChinaAid, the main source of information about Chen while he was at the U.S. Embassy, said in a statement.

The issue cast a shadow over this week's visit to Beijing by Clinton for talks intended to improve ties between the world's two biggest economies.

Despite the friction, a U.S. official said China would raise foreign ownership limits in domestic joint-venture securities firms and allow them to trade commodities and financial futures in a move to further liberalise capital markets. Treasury Secretary Timothy Geithner said China had also made significant reforms to its currency regime, long a bone of contention.

Clinton told Chinese President Hu Jintao ties were the strongest they had ever been. Nevertheless, Beijing has accused the United States of meddling in its affairs in the Chen case.

Chinese human rights lawyer Tang Jitian cautioned that the authorities could easily hold up the paperwork to delay Chen's departure from China. China's security forces might not be as keen as its diplomats for a quick exit.

"How it will play out we don't know. For instance, getting the approval for the paperwork to go, there are many potential pitfalls," said Tang. "We can't be 100-percent optimistic."

U.S. officials said they did not know when Chen might leave but said they had no reason to believe it would be this weekend.

STARBUCKS-SIPPING TROUBLEMAKER

The Obama administration has come under criticism for its handling of the matter, particularly from Republicans such as House Foreign Affairs Chairman Ileana Ros-Lehtinen.

"U.S. officials made a mistake by escorting Chen away from the safety of the U.S. embassy and into an uncertain fate," she said. "The State Department must press China to carry out its commitments. We cannot assume that this saga has been resolved."

Congressmen Chris Smith and Frank Wolf, both Republicans, hope to grill senior U.S. officials as soon as next week.

Chen himself was attacked by one of China's main official newspapers, which accused him of being a pawn of U.S. subversion of Communist Party power and described U.S. Ambassador Locke as a backpack-wearing, Starbucks-sipping troublemaker.

"Chen Guangcheng has become a tool and a pawn for American politicians to blacken China," the Beijing Daily said.

The dissident's village remained under lockdown. Guards chased away two Reuters reporters who attempted to enter the village on Friday. The four heavy-set guards ran slowly, yelling at the reporters as their car drove away.

The Chen case comes at a tricky time for China, which is engaged in a leadership change. The carefully choreographed transition has already been knocked out of step by the downfall of ambitious senior Communist Party official Bo Xilai in a scandal linked to the apparent murder of a British businessman.